Corporate development today: driving strategy, accelerating growth Global Corporate Development Study

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1 Corporate development today: driving strategy, accelerating growth 2015 Global Corporate Development Study

2 Contents Page 2 The strategic imperative 44% say more strategic focus is the biggest change in the CDO role Page 6 New demands require new skills 73% cite the commercial assessment process as important factor for transactions to fail Page 12 Greater rigor drives reassessment of CDF structures 47% cite deal pipeline and opportunity analysis as a leading way their team is currently measured Involvement in the Capital Agenda Our 2015 survey respondents are more involved in leading on all capital allocation decisions than ever before. While the CDF s primary focus is inherently on investing capital, it also plays a vital role in optimizing corporate capital deployment. Sixty-five percent of respondents say they lead and perform (43%) or lead only (22%) in optimizing capital activities, a strong increase from our last survey. 44% 6% 20% 30% 11% 7% 24% 57% Raising: Do we have the right capital structure to meet our strategic priorities? Fifty percent of respondents lead and perform or lead only on raising capital, mainly through divestitures (67%), while fewer lead on fundraising through equity (50%) or debt (44%). Respondents from the Americas are less involved in raising capital. Preserving: How can we improve the performance of our assets? Forty-one percent of respondents lead and perform or lead only on preserving capital, mostly on operational restructuring (55%) and cost reduction (49%), with only 32% leading on refinancing and 28% on supply chain management. Raising Preserving The Capital Agenda Investing Optimizing Investing: What is the best way for our company to grow, and is it aligned to our core business? Eighty-one percent of respondents lead and perform or lead only on investing capital, from deal origination (91%) and valuation (95%) to due diligence (94%) and negotiation (92%). Fewer respondents lead on board/stakeholder approval (67%), tax planning (65%) and investor relations (43%). Optimizing: What steps can we take to maximize our portfolio s performance? Sixty-five percent of respondents lead and perform or lead only on optimizing capital, mostly on portfolio rationalization/divestments (76%) and asset portfolio review (69%). Fewer respondents lead on measuring ROIC (60%) or on cash flow forecasting/working capital management (55%). 54% 5% 19% 22% 25% 10% 22% 43% Not involved Perform only Lead only Lead and perform

3 Introduction Steve Krouskos Deputy Global Vice Chair, Transaction Advisory Services Our new corporate development study finds significant changes in the role and responsibility of the corporate development function (CDF). After years of uncertainty and contraction in the deal market and the global economy, companies are once again actively seeking to grow through mergers and acquisitions (M&A). Seizing opportunities while still focusing on optimizing capital and portfolios is high on the corporate agenda. In the context of rapid market changes, blurring of sector lines and disruptive forces such as enhanced geopolitical concerns and shareholder activism strategic growth objectives are translating into a wider remit for corporate development officers (CDOs). CDOs are playing an increasingly vital role in strategy at both the corporate and business-unit levels. That change is leading to even greater involvement in portfolio optimization and commercial assessment. While this increases the profile and importance of the role, it also brings broader responsibilities and a need to develop new skills. Over the past five years, the CDF has developed more formalized processes to evaluate deals, is conducting regular portfolio reviews of the business and increasingly understands the need to perform cultural fit assessments as globalization widens the scope of potential targets. With a greater emphasis on strategy, it now also needs a stronger grasp of such megatrends as digital transformation and big data analytics, as well as understanding the latest regulatory and tax implications of deals. A number of companies are responding to these challenges with new thinking. The concept of the chief growth officer has already been seized by early adopters. It could be the next evolutionary leap for corporate development, given the function s increasing convergence with strategy. Our latest study certainly suggests this as a possibility while highlighting emerging trends and providing insights on best practices being adopted today. Driving strategy, accelerating growth. Four simple words but they signal very different and very complex challenges and demands for the CDO. New challenges require new responses. Our study finds corporate development at a transformational inflection point. The most successful CDOs in the future are likely to be those refocusing, reshaping and perhaps even reinventing themselves today for the needs of tomorrow. Steve Krouskos 1

4 1. The strategic imperative Has your corporate development function kept up with change? CDOs are becoming more influential in corporate strategy, taking on new responsibilities and increasingly becoming better positioned to influence corporate success. The responses to our 2015 Global Corporate Development Study indicate that the roles of the CDO and the CDF will look very different in the years ahead. Corporate development executives need to be able to handle a range of new responsibilities and challenges and realize that success will not come easily. Digital transformation across all sectors, increasing shareholder and regulatory scrutiny, and the heightened presence of global competitors are among the megatrends reshaping M&A in profound ways. Those corporations that have begun to take advantage of new technologies and advanced analytics and that are shoring up their strategic competencies are seeing market-differentiating results in the outcomes of the deals they pursue. Strategic alignment The CDF, led by the CDO, is now at the heart of the organization s growth strategy. Our survey clearly shows that strategy and strategic planning have become critical priorities for corporate development. Among our survey respondents, 44% report that the biggest change in the role of the CDO over the past five years is the strategic focus, and 75% say they are most satisfied when transactions meet strategic objectives. The CDO role used to be more opportunistic in nature, whereas now it has changed to being more a part of the strategic goals of the business, notes one executive who responded to our survey. The role has become more of a driver in the M&A process, not just a coordinating role but also taking a significant part in the process. Not surprisingly, alignment with strategy is a success factor that executives cite repeatedly. With more than half of our respondents focused on growth, it is critical for CDFs to execute on a growth strategy. Two-thirds of our respondents point to alignment with key executives and departments as the most important factor in enabling them to do so. The role of the CDO is expected to evolve to include strategic planning on top of the existing business development, M&A, portfolio management and optimization functions, says an executive at an emerging market conglomerate. 2

5 Table 1: What is the biggest change in the role of the CDO over the past five years? 44% Strategic focus 18% 16% 10% Deal process Size of deals Volume of activity 6% Reporting lines 3% 3% Focus on acquisition versus divestment Other Table 2: What is your satisfaction with aspects of transactions conducted in the past two years? 5% 20% 30% 26% 5% 25% 21% 8% 22% 27% 5% 22% 45% 44% 49% 46% Achieving strategic objectives Quality of deals considered Efficiency of due diligence process Valuation: acquisitions 12% 3% 20% 1% 12% 20% 5% 3% 17% Not satisfied at all 22% 43% 29% 38% 35% 40% Somewhat unsatisfied Neutral Somewhat satisfied Very satisfied Percentage of deals closed Transaction integration Valuation: divestitures The most satisfied respondents For each respondent, EY summed the scores for each answer to these seven key aspects of transaction satisfaction. We used this score to separate the top third of respondents this group we call the respondents who are most satisfied with transactions. In the balance of the report, we compare the answers for the most satisfied respondents against all other respondents, and highlight significant differences as items correlated with transaction satisfaction. Table 3: What are the key success factors in executing on a growth strategy? 1% Other 23% Executive performance metrics Note: Up to three responses allowed. 31% Evaluation of key metrics 47% Integrated implementation team 59% Clearly defined strategy performance metrics and goals 62% Existence of clearly defined strategy 67% Alignment of strategy from key executives/ departments 3

6 Convergence of M&A, corporate strategy and sharing of resources Although the CDO and Chief Strategy Officer (CSO) roles remain separate in most organizations, the connection and collaboration between the two are becoming much stronger, with the roles overlapping in various aspects of the transaction life cycle, particularly portfolio management, new market expansion, defining growth priorities and obtaining competitive intelligence (Table 4). A number of companies that responded to our survey are already more proactive in terms of pipeline management and deal origination, dedicating more internal resources and time than they did in the past to identify the right targets. For example, they are making better connections with their business units and leveraging advanced technical methodologies. They now evaluate potential acquisitions much earlier, long before the actual transaction. One respondent explains that within the broader corporate development function, they are able to draw on a significant number of resources, with large strategy teams giving the ability to bring together fairly important virtual teams. Another respondent says, With a development toward a more active strategy department, the CDO is now able to have a more active and relevant counterpart in strategic discussions. Table 4: Please indicate where you believe you play a leading role in corporate strategy Ensuring M&A decisions are grounded in portfolio reviews and sound financial data Aligning M&A and/or divestment strategy with capital allocation decisions Analysis of strategic alternatives and portfolio optimization 55% 57% 77% 74% 68% 74% Table 5: Please indicate the extent to which you are involved in the following aspects of the transaction cycle Corporate strategy Transaction strategy Transaction opportunity Transaction execution Transaction negotiation/ close Transaction effectiveness CDOs CSOs, others 2% 7% 18% 73% CDOs CSOs, others 5% 38% 58% CDOs 8% 27% 17% 48% 5% 25% 70% 1% 12% 9% 78% CDOs CSOs, others 1% 7% 32% 60% 3% 17% 80% CSOs, others 4% 4% 33% 60% 2% 5% 12% 82% CDOs CSOs, others 4% 5% 26% 66% 17% 10% 23% 50% CDOs CSOs, others 6% 9% 23% 63% Not involved Perform only Lead only Lead and perform Note: percentages may not add to 100 due to rounding. Innovation/expansion into 52% new geographic markets 58% Prioritize markets investment Competitive intelligence CDOs CSOs, others 51% 58% 51% 51% Define strategic priorities, 46% including organic growth 70% The strategy and M&A teams sit next to each other, so there is more often healthy competition to generate bright ideas rather than a specific delineation of roles, according to a transaction executive at a European consumer products company. 4

7 2015 Global Corporate Development Study Table 6: Is the next step for the CDO to elevate to a Chief Growth Officer (CGO) or Chief Portfolio Officer (CPO)? Focus of corporate development Prefinancial crisis Financial crisis Post financial crisis The new normal and beyond Focus on deal strategy and execution Acquisitions dominate thinking PE strong competitor for deals Domestic regulatory frameworks and favorable environments Geographic expansion emerging markets a strategic imperative Broader strategic focus important Divestments on agenda Defensive mergers and balance sheet deleveraging Strategic buyers re-emerging Global regulatory convergence and tightening regulation Rethinking geographic footprint as portfolios are reassessed Greater awareness of financing Greater balance between acquisitions and divestments Increase in partnership deals Greater creativity in doing deals Increased awareness of financing and balance sheet constraints Greater alignment with the treasury function and the lending community Greater uncertainty and caution around deal-making More involvement in integration Increased focus on performance evaluation Increased leading role in the Capital Agenda Focus on portfolio management and optimization Achieving strategic objectives Commercial and operational assessment takes center stage Role in defining growth strategy Greater deal competition More proactivity in sourcing/ pipeline management Use of big data/ analytics tools Risk no longer seen correlated to deal size After years of focusing internally on managing costs and lowerrisk organic growth following the global financial crisis, many companies are starting to focus actively on M&A as a route to future growth. Executives who responded to our 2015 Global Corporate Development Study named their top transaction objectives in the past 12 months as strengthening their core business, achieving economies of scale and acquiring a customer base. Among their key objectives for the next 12 months are a greatly increased focus on entering new geographic markets and developing new products placing growth at the front and center of their strategy. Aligning M&A strategy with corporate strategy CDO M&A Transaction strategy Capital allocation In fact, a growth strategy is now so important that the prospect of strategy and corporate development becoming a single unit, with a CGO or CPO at the head of it, is a distinct possibility. A few leading-edge companies have already appointed a CGO, and other businesses are considering such a position. CGO? CPO? Portfolio management Acquisitive growth Growth strategy After making the numbers, growth is the main objective, and the CDO owns that, says a transaction executive at a US manufacturing company. 5

8 2. New demands require new skills Are you set for new challenges? The emphasis on strategy and the convergence of roles means that the CDO of the future must be able to face a range of new challenges, acquire new skills, and develop or strengthen relationships with key departments/executives. While strategic planning and finance are currently the most common skill sets resident in the CDF, most of the other competencies that our respondents would like are related to risk management. Executives cite legal, regulatory and tax skills as the ones they would most want to add to the CDF, and the presence of these skills correlates with higher deal satisfaction. Respondents who are more satisfied with transactions are more likely than others (66% vs. 44%) to have legal skill sets available in the CDF. They are also more likely to have regulatory skills (63% vs. 27%) and tax skills (44% vs. 22%) in the CDF. One skill in relatively short supply is big data analytics: just 21% of the CDFs surveyed have this competency, an area that they will need to address as big data increases in importance to corporate development (see page 10). Doing the right deal: strategic issues top the agenda Commercial assessment will be a major strategic challenge. It is one of the two leading causes of deal failure (the other being strategy), according to the vast majority of the respondents to our study. Strategy and commercial assessment are at the heart of all transactions, and if these fundamental processes are flawed, it is almost impossible for the deal to succeed. Our findings make a strong case for the importance of a robust strategy and a formal M&A process that includes detailed pre-transaction analysis, looking at targets on the basis of a commercial as well as financial assessment. A thorough commercial assessment involves understanding the market, the competition and the target s business model. The assessment also takes into account the target s products and services, synergies and potential to create value for the acquirer. To spot and make the right deal in today s complex marketplace, the CDF will need to be able to use advanced analytics of big data, mining vast amounts of structured and unstructured information and turn them to a commercial advantage. While analytics is most often used in the valuation stage, only two-thirds of respondents regularly use analytics to achieve strategic objectives and less than half to improve the percentage of deals closed. 6

9 71% 72% Table 7: Please indicate the resident skill sets in the CDF Table 8: If you were able to add another skill set to your function, what would it be? Strategic planning Finance Accounting Legal Business unit/operations Corporate governance Regulatory Risk management Tax Treasury Big data/analytics Investor relations Sales and marketing Information technology Human resources Real estate 88% 83% 65% 52% 46% 42% 40% 36% 29% 25% 21% 21% 19% 11% 10% 4% Note: multiple responses allowed Table 9: Causes for transactions to fail Table 10: Use of analytics in the transaction life cycle 52% 54% 60% 46% 54% 58% 66% 68% % quite or most important 73% % Regular or extensive use 83% Deal management process Corporate development process Integration process Strategic process Commercial assessment process Percentage of deals closed Efficiency of due diligence process Transaction integration Quality of deals considered Achieving strategic objectives Valuation: divestitures Valuation: acquisitions 7

10 Operational assessment, multicultural competencies Operational assessment (business plan, technology, supply chain, human resources) is another area in which corporate development is becoming more deeply involved. Our respondents indicate having used external advisors or other business units to obtain services such as operational diligence, modeling/business planning and commercial diligence. This indicates the need to develop skills and competencies that may not have been part of the CDF traditionally. Another new skill is assessing multicultural competencies. A global playing field has brought new players from all over the world into the deal space, resulting in issues of cultural fit and requiring M&A strategists to learn different styles of dealmaking and stakeholder management. Our results show a significant increase in the number of respondents that plan to enter new geographic markets in the next 12 months 60%, up from 43% in the last 12 months and this will present its share of challenges. Furthermore, deal structures in many markets are highly complex, often involving joint ventures, partnerships, alliances and arrangements other than straightforward mergers and acquisitions. Table 11: Top 3 areas where the CDF has used services from other business units (BUs) on transactions over the last 12 months 1 Operational diligence 33% 2 3 Modeling/ business planning Commercial diligence Note: multiple responses allowed 30% 27% Table 12: Business objectives and rationale for transactions The complexity of the transaction process has increased with the inclusion of cultural fit assessments and increased focus on seller and key stakeholders in the target business, says a transaction executive at a European consumer products company. Entering new geographic markets Strengthening the core business Acquiring new technology Acquiring customer base New product development 34% 43% 43% 48% 53% 45% 60% 56% 60% 53% Achieving economies 45% of scale 58% Portfolio optimization Speed to market 29% 38% 42% 43% Next 12 months Last 12 months Note: multiple responses allowed 8

11 2015 Global Corporate Development Study Growing involvement in portfolio management A major strategic challenge that CDOs will face in the future will be the task of re-balancing acquisitions with divestments in a role and culture that has typically focused more on acquisitions. Our respondents spend roughly 80% of their time on acquisitions, and are preparing to spend more time on acquisitions that will fundamentally change their business. They expect the average percentage of their time spent on such transformational acquisitions to increase in the next two years, to 25.1% from 16.7% currently and just 12.5% five years ago. At the same time, in two years they expect to spend even less time on divestments than they do now. But it is advisable to not lose focus on divestments, because they create value, are a strategic route to longer-term growth and should be considered as part of regular reviews of the entire portfolio. In a business environment marked by rapid technological advances, regulatory changes, increased shareholder scrutiny and shifts in customer purchasing power and demand, strategic portfolio reviews are the most important tool to optimize capital and resource allocations and determine what decisions to make regarding growth, restructuring or potential divestment. The CDO s role is central to these decisions, and our study reveals that respondents are indeed more involved in leading on all capital allocation decisions than they were in Table 13: What percentage of your time was spent on the following activities five years ago and now? What do you expect it to be in two years? Buy side: Small to mid-size acquisition Acquisition of a minority interest Transformational acquisition Sell side: Small to mid-size divestment IPO/spin-off Transformational divestment The corporate development function of the future will be inspired by fund management; evaluation of investment performance and investment opportunities will be very important, says a transaction executive at a European power and utilities company. Other % of time five years ago average Current % of time average Expected % of time two years from now average 9

12 Spotlight Big data analytics can be a big deal for M&A Respondents who are most satisfied with transactions are much more likely than others to use analytics regularly or extensively with regard to the quality of the deals considered (73% vs. 53%), efficiency of the due diligence process (75% vs. 42%) and percentage of deals closed (66% vs. 34%). Big data is commonly defined in terms of four V s volume, variety, velocity and veracity. Data has exploded at an astonishing rate in both volume and velocity (the speed at which it comes, as well as how fast it needs to be analyzed) in the last few years; it is present in a huge variety of structured and unstructured forms, and can sometimes lack veracity or accuracy. Analytics is the means for extracting value from this data the tool through which actionable insights are generated. In a study released in 2013, International Data Corporation predicted that the big data technology and services market would grow at a 27% compound annual growth rate, reaching US$32.4 billion by 2017 or about six times the growth rate of the overall information and communication technology market. Big data has huge potential to transform the effectiveness of CDOs and the teams they lead. So far, companies have been conducting business analytics for specific functions. At the valuation stage, 84% of our respondents make moderate to extensive use of analytics, but by and large, they have not yet leveraged the full potential of big data and/or analytics in M&A. Ways in which big data analytics can boost deal effectiveness include: Using predictive analytics and forecasting to figure out the risks and opportunities in a deal Drawing quantitative and qualitative insights from social media analytics during due diligence on a target and its products Understanding key business cycles by employing analytics (e.g., working capital) Employing a decision-making framework based on data science to reach an objective view of a strategic portfolio Improving the efficiency of the divestiture process and preparing carve-out financial information Identifying potential synergies by utilizing larger data sets and determining whether the expected synergies are likely to be realized Big data analytics can have a significant impact on business improvement and transactions. The following are some examples of how analytics can help companies in a transactional context: Social media analytics While performing due diligence on behalf of a company in the automotive aftermarket, an EY client-serving team used social media analytics (SMA) to analyze a large data set of about 500,000 online posts to gain deeper insights into a target and reach an objective view on the target products. The target company asserted that its superior warranty policy and product quality had been the driver of revenue growth historically. But SMA highlighted that relative pricing was a much more significant driver, with the diligence providing a cost-reduction opportunity on warranty policy. During an engagement in the food and beverage industry, an EY client-serving team used SMA to analyze a data set of approximately 400,000 online and social media discussions to gain deeper insights on a target. SMA highlighted that the target s product taste was significantly inferior to the competition and a deterrent to future growth. The diligence implication was that the target had been underspending on product development and reformulation costs, providing a significant post-close revenue enhancement opportunity requiring investment. Cash management A telecom company had a large customer base but fragmented visibility into its accounts receivable (AR). EY client-serving teams provided detailed transactional data analysis that allowed the company to institute a cash culture program to ingrain AR metrics into the company culture, compress payment terms, accelerate initial customer contact for collections and consolidate the number of collection paths. The company established a structured approach to mitigate risk and saw a notable cash-flow improvement. Using sophisticated analytics, a global pharmaceutical company was able to liberate cash from working capital to pay down debt that it had incurred during an acquisition. There were clear opportunities for improvement in order-to-cash, purchase-to-pay and inventory, and analytics helped the company optimize these opportunities. For more information about EY s analytics services, visit ey.com/analytics or contact: John Hopes Partner, Transaction Advisory Services, EMEIA jhopes@uk.ey.com John E Burns Partner, Transaction Advisory Services, Americas john.burns@ey.com Stuart Bright Partner, Transaction Advisory Services, Asia-Pacific stuart.bright@au.ey.com 10

13 Spotlight Regional variations Americas 18% 47% 60% 74% 41% Europe, Middle East and Africa 45% 57% 81% 67% 40% Asia-Pacific 20% 64% 80% 53% 89% have a separate M&A committee lead and perform on corporate strategy are satisfied with the efficiency of the due diligence process use analytics for the valuation of divestitures say the CDO is accountable for transaction integration have a separate M&A committee lead and perform on corporate strategy are satisfied with the efficiency of the due diligence process use analytics for the valuation of divestitures say the CDO is accountable for transaction integration have a separate M&A committee lead and perform on corporate strategy are satisfied with the efficiency of the due diligence process use analytics for the valuation of divestitures say the CDO is accountable for transaction integration Top 3 transaction objectives 1. Strengthen the core business 2. Enter new geographic markets 3. Acquire customer base Top 3 ways CDO teams are measured 1. Fit of deals with corporate strategy 2. Corporate performance/stock price 3. Number of deals completed Top 3 reasons for transaction failure 1. Integration process 2. Commercial assessment process 3. Strategic process Top 3 transaction objectives 1. Enter new geographic markets 2. Acquire new technology 3. Strengthen core business Top 3 ways CDO teams are measured 1. Deal pipeline and opportunity analysis 2. Fit of deals with corporate strategy 3. ROI on completed transactions Top 3 reasons for transaction failure 1. Strategic process 2. Commercial assessment process 3. Integration process Top 3 transaction objectives 1. Achieve economies of scale 2. Acquire new technology 3. Enter new geographic markets Top 3 ways CDO teams are measured 1. Corporate performance/stock price 2. Realization of transaction synergies 3. ROI on completed transactions Top 3 reasons for transaction failure 1. Corporate development process 2. Commercial assessment process 3. Deal management process 11

14 3. Greater rigor drives reassessment of CDF structures What are the new ways to enable and measure success? Focus on risk management and corporate governance Not surprisingly, although CDF s strongest relationships are with the finance and legal departments, those respondents with higher deal satisfaction have stronger relationships with the corporate governance, regulatory, risk management and information technology functions. As our survey shows, companies are approaching deals of all sizes with increasing rigor and are moving toward formalized and standardized deal processes in the face of growing competition from private equity players and greater focus on corporate governance by boards and shareholders. Among our respondents, those who are most satisfied with deals are more likely than the others to frequently use a formalized process for asset portfolio review (81% vs. 59%), continuous improvement (80% vs. 62%), operational separation (77% vs. 60%), benchmarking (73% vs. 61%) and big data/analytics (64% vs. 45%). We try to follow a standard execution process, as risk is not correlated to deal value, explains a transaction executive in the courier industry. Setting up M&A committees Notably, executives report a growing preference for separate M&A committees that advise top executives and board members on deals. This is particularly the case in EMEA, where 45% of our respondents have a separate M&A committee (compared to 29% overall and just 18% in the Americas). Our survey clearly demonstrates that the presence of an M&A committee correlates with higher deal satisfaction: respondents who are more satisfied with their transactions are more than twice as likely as other respondents (44% vs. 21%) to have a separate M&A committee. While M&A committees differ in their structure, what they all have in common is giving M&A a strong voice in the boardroom. There is no clear consensus on what the ideal governance structure should be. At one global company, an M&A/investment committee advises on all acquisition processes and helps the board make decisions. At another, a multidisciplinary executive committee, along with senior board members, evaluates all transaction ideas and makes an initial decision on which ones to take forward. The M&A committee governs this process and, in the words of an executive at the company, aims to protect the group, not to please everyone. The more structured process for linking up the transaction process with strategy is mainly represented by the M&A council, explains a transaction executive at a European automotive company. 12

15 Table 14: Please indicate the strength of the working relationship between the CDF and the given function Table 15: When executing transactions, how often do you use a formalized process for the following? Finance 88% Valuation 95% Legal 86% Due diligence 95% Strategic planning 84% Board/stakeholder approvals 90% Accounting 82% Synergy identification/analysis 88% Business unit/operations 82% Documentation of key transaction decisions 86% Tax 78% Transaction integration 86% Treasury 75% Post-closing adjustments 86% Corporate governance 71% Transaction measurement 81% Regulatory 68% Tax minimization 78% Investor relations 63% Opportunity analysis 75% Risk management 60% Continuous improvement/feedback 69% Sales and marketing 53% Investor relations 68% Human resources 52% Operational separation (divestments/carve-outs) 67% Information technology 46% Asset portfolio review 67% Real estate 33% Benchmarking 65% % strong or very strong Big data/analytics 52% % often or always Table 16: Does your board have a separate M&A committee? Table 17: Potential options for M&A committees Who is the chair? CDO CFO Yes 29% Frequency? Quarterly Monthly Each stage of M&A process (NDA, non-binding offer, DD, final offer) No 71% Structure? Deal approval threshold? CDO, head of BU, country/area director, research director CFO, CDO, VP BD, division CEO M&A, strategy Everything Up to US$5m Up to US$100m 13

16 Evolving performance measures for an evolving role Performance measurement is challenging and an issue that a number of our respondents consider problematic. In our survey, 95% of respondents report that corporate performance is important or very important in determining individual compensation, and 85% report that achieving strategic objectives is an important or very important measure affecting individual compensation. Although it is difficult to apply quantitative metrics to every aspect of the function, reliable measures are a component in determining the effectiveness of both the CDO and the CDF. Respondents who are most satisfied with compensation, benefits and incentives are more likely to have department performance affect their compensation. But the challenge lies in defining precisely what individual performance means: the measures our respondents use run the gamut from cost, time and quality to the success of past acquisitions to, in one case, what other people in the organization say. Team measurement has more specific definitions: teams are measured most commonly on deal pipeline and opportunity analysis (47%) and fit of deals with corporate strategy (46%). Respondents who are most satisfied with compensation, benefits and incentives are more likely than other respondents to have their team performance measured by the actual price received or paid versus the original plan. Can soft measures better assess performance? Still, team measurement has its share of difficulties, in our respondents view. It is not easy to derive performance measures for the corporate development team, observes one executive. The number of deals done and deal generation are all possible measures, but each comes with advantages and disadvantages. Another executive says that in the previous year, the team had conducted one of the largest deals ever and got no bonus as the group performance didn t meet the requirements. One company reports that it can be very difficult to make changes to compensation systems in the industry in which it operates, and another believes that the best system should be subjective you don t want incentives to do deals for the sake of activity. To deal with the difficulty of hard performance measures, a number of companies are setting up so-called soft measurement through internal satisfaction questionnaires that qualitatively assess their use to the broader business and the smoothness of the M&A process on both completed and failed deals, based on the assumption that the corporate development team is an internal advisor and that is how it should be assessed. This subjective assessment may be more useful in the case of acquisitions, as the best outcome may be not to buy, whereas in divestments, the exit decision has already been made and so deal completion would be a relevant measure. Table 18: Please rate the importance of the following factors with regard to direct impact on your individual compensation Corporate performance Individual performance Department performance Discretionary Other, please specify % somewhat or very important Table 19: Please rate the importance of the following measures with regard to indirect impact on your individual compensation Achieving strategic objectives Discretionary Continued deal performance Number of deals completed Effective integration Acquiring revenue Number of deals considered Other, please specify Key department measures ROI of completed transactions Actual price vs. original plan Key compensation factors Discretionary Department performance % somewhat or very important Table 20: What are the top three ways teams (departments) are currently measured? Deal pipeline and opportunity analysis Fit of deals with corporate strategy Return on investment of completed transactions Corporate performance/stock price Number of deals completed Realization of transaction synergies Actual price received/paid versus original plan Other Note: up to 3 responses allowed Table 21: Profile of a desirable package based on measures correlated to satisfaction with compensation, benefits and incentives Key measures used to determine compensation Effective integration Acquiring revenue Continued deal performance Discretionary Number of deals completed Number of deals considered 95% 82% 76% 66% 8% 85% 65% 60% 59% 58% 57% 47% 7% 47% 46% 39% 37% 34% 32% 25% 8% 14

17 2015 Global Corporate Development Study The most common integration metrics Transaction integration is a measure that affects both individual and team compensation and correlates with deal satisfaction. Our survey shows that executives who are more satisfied with transactions tend to follow certain integration procedures. They are more likely to implement practices such as goal setting, businessunit accountability for integration results and executive-level reviews of integration success. Although the majority of respondents overall hold the business leader accountable for integration, respondents who report higher satisfaction with deals are more likely than others to assign accountability to the integration manager (79% vs. 56%) and the CDO (56% vs. 43%). Table 22: Most important metrics for monitoring and reporting on the integration efforts 1 Financial profitability 85% Value of synergies delivered versus 2 plan 72% 3 against Synergy delivery timetable 71% Note: multiple responses allowed Table 23: Who is accountable for transaction integration? Integration manager CEO 74% 64% 48% 33% 16% Business unit leader CDO CFO 15

18 Looking ahead Are you prepared? Our survey shows that the most satisfied corporate development leaders today are forward-thinking and do things differently from their peers. They are more likely than their counterparts to take the lead on new market investments, establish formal deal and portfolio review processes, have a variety of risk management skills (including legal and tax) as part of their CDF s skill set and receive what they consider a desirable compensation package. But this is not enough. What is adequate or even leading-edge today will not be sufficient to succeed in the M&A market of tomorrow. The CDF and the CDO in the lead will likely take a different path, managing new issues related to a broader strategic scope. They will often be tasked to come up with fast and innovative answers to questions they may never have been asked to deal with in the past. The upside is almost unlimited potential to succeed, both for the CDO personally and for the organization; the downsides are uncertainty, risk and lack of planning for the major shifts in the role. Based on our research, we recommend that corporate development executives take the following five steps to prepare themselves for what they are likely to encounter in the next few years. 1. Prepare to lead on strategy. 2. Take a (big) technology leap. CDOs have always been involved in strategy to some extent, but as they get more involved in both corporate and M&A strategy, they will need to have a strong grasp of not only the specifics of the deal market but also prevailing global megatrends such as digital transformation and the many disruptive forces in play today across all sectors. Plotting a growth course in line with the long-term objectives of their organization and the dynamics of their industry will be paramount. That means being willing to dive into advanced technologies such as big data analytics. In a complex, highly competitive deal environment, exhaustive research and due diligence can make all the difference to the success of a deal. With advanced analytics, corporate development executives have a unique opportunity to explore and understand better the various factors that can affect a transaction and to make decisions accordingly. 3. Strengthen the CDF s in-house skill set. 4. Take a holistic approach to M&A. As the CDF becomes more involved in decisions about portfolio optimization and pipeline management, a whole array of new in-house skills will become necessary, particularly legal, tax and regulatory skill sets. For many companies, these may not traditionally have been part of the CDF s repertoire, but they will be essential in the future. Deal structures are becoming complex and are no longer a matter of straightforward M&A. Particularly in emerging markets, where deals are in many cases driven by regulatory requirements, transactions will involve a huge variety of partnerships, joint ventures, alliances and other arrangements. Adopting a portfolio approach to M&A will be essential, looking at the business as a whole and adopting a balanced approach and corporate development leaders will need to extend the capabilities of their functions to do this. 5. Measure and reward performance appropriately. The majority of our respondents indicate that they are not fully satisfied with either individual or team performance measures, pointing to the subjectivity of these metrics and the difficulty of quantifying them. The successful CDO will be able to put together measures that capture the range of tasks that the CDF is responsible for and not only recognize the successful performance of those tasks but also provide objective incentives and rewards. Ultimately, M&A strategists, in the CDF and elsewhere, are measured on their contribution to the company s growth. As one of our survey respondents told us, The best exit provision is preventing an exit. We focus on ensuring that we have the right business model, the right alignment and the right level of engagement to increase the probability of success. It comes down to being able to develop a viable business plan that, once executed, continues to generate an acceptable business return that maintains each party s ongoing interest in the success of the venture. 16

19 About the research Over the past decade, EY has worked side by side with senior leaders of the corporate development function (CDF) as their role has evolved to meet the demands of a changing and challenging business landscape. The 2015 Global Corporate Development Study is a multi-phase research initiative. The study targets the corporate development officer (CDO) or most senior person within the organization with responsibility for M&A/transactions and the chief strategy officer (CSO) or most senior person within the organization with responsibility for corporate/operating unit strategy. We surveyed more than 300 CDOs, CSOs and other C-level executives between June and October The majority of respondents spend at least 61% of their time on transactions. Respondents came from companies in 39 countries; 54% of the companies surveyed reported revenues of more than US$5 billion. Nearly two dozen industry sectors were represented, and the top five industries were consumer products, industrial products, oil and gas, technology, and power and utilities. Our data collection methodology included online and telephone surveys, face-to-face interviews, group sessions similar to focus groups, and independent research. Regional split 47% Americas 39% EMEA 14% Asia-Pacific 3% 2% 2% 2% 1% 1% 14% 13% 4% 4% 5% 13% 6% 6% 10% 54% 33% 8% 9% 10% Industry split Retail and consumer products Industrial products Oil and gas Technology Power and utilities Life sciences Automotive and transportation Financials Other Health care Telecommunications Government and defense Media Real estate and construction Mining and metals Asset management Chemicals Revenue split <US$1 billion US$1 US$5 billion >US$5 billion Note: EMEA includes Europe, the Middle East and Africa. 17

20 Contacts Global Pip McCrostie Global Vice Chair Transaction Advisory Services Regional Leaders Americas Richard M. Jeanneret Americas Leader Transaction Advisory Services Europe, Middle East, India and Africa (EMEIA) Andrea Guerzoni EMEIA Leader Transaction Advisory Services andrea.guerzoni@it.ey.com Steve Krouskos Deputy Global Vice Chair Transaction Advisory Services steve.krouskos@uk.ey.com Asia-Pacific John Hope Asia-Pacific Leader Transaction Advisory Services john.hope@hk.ey.com Japan Kenneth G. Smith Japan Leader Transaction Advisory Services kenneth.smith@jp.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda EYGM Limited. All Rights Reserved. EYG no. XXXX BMC Agency GA ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com